As global long-term bond yields surge and recent remarks from Fed Governor Waller at Jackson Hole have significantly boosted rate hike expectations, Friday's August US jobs report will test whether the labor market is weak enough to veto further tightening. However, the latest policy pricing has already undergone a crucial adjustment.

Fed Governor Christopher Waller stated on September 3rd that if August inflation continues to cool, he would prefer holding rates steady in September, only considering a hike if inflation re-accelerates. His comments swiftly brought September hike odds down from roughly 65% to near coin-flip levels, lifting US stocks and pulling Treasury yields lower. If nonfarm payrolls land close to the expected 53,000–56,000 and unemployment holds at 4.1%, even soft hiring would simply extend the "low hiring, low layoffs" stability, giving the Fed room to focus on inflation. Only if job growth turns negative again and unemployment climbs to 4.2% or higher would markets meaningfully pare back rate hike bets. Conversely, a strong payroll number could prove the economy can withstand higher rates but would not alone force Fed action, since inflation trends remain the ultimate policy anchor emphasized by both Waller and his colleague.

Recent US employment data paints a picture of a summer marked by "nearly stalled hiring yet contained layoffs" rather than a recessionary collapse: June and July combined saw a net loss of 3,000 jobs, August is projected to add just 53,000, yet initial jobless claims remain low at 206,000 and corporate layoff announcements are down 41% year-to-date. Geopolitical conflicts, energy prices, tariffs, and AI-related uncertainty are suppressing hiring, while a shrinking labor supply has lowered the threshold for new jobs needed to keep unemployment stable. This suggests that weak payroll growth no longer automatically signals recession, nor is it sufficient to stop the Fed from hiking again due to inflation.

Hiring Nearly Frozen, Layoffs Still Controlled: US Jobs Enter a 'Low-Flow' Summer

Friday's August US jobs report is expected to close out a summer of relatively stagnant employment growth. According to the consensus forecast from a Dow Jones survey, the Labor Department's data is projected to show just 53,000 new nonfarm payrolls. Even at this weak pace, it is expected to keep unemployment at 4.1%. Viewed more broadly, however, this report follows June and July, which together saw a net decline of 3,000 jobs. Additionally, the initial August reading has been revised downward for the past four consecutive years. Combined, these figures indicate a labor market that is neither booming nor collapsing—and for Fed officials planning their next policy move, employment is increasingly taking a backseat.

"The current state is stable but unremarkable," said Dan North, senior economist for North America at Allianz Trade. "I don't see much truly strong growth, which makes sense because if you're an employer, you're facing a potentially prolonged war, fluctuating energy prices, tariffs, and a government that can change everything almost overnight," he added. "There's a lot of uncertainty out there." In fact, high energy costs driven by geopolitical uncertainty and the disruptive impact of AI on traditional labor are the two dominant themes in the US jobs market. At the same time, a shrinking labor pool is helping keep unemployment steady. Despite these pressures, US companies have avoided widespread layoffs—weekly jobless claims remain contained, and outplacement firm Challenger, Gray & Christmas reports that overall layoff pace in 2026 is the slowest in four years.

Employment Slips to the Backseat: Inflation Steers the Fed's Next Move

Fed officials have indicated in recent days that they are far less concerned about the labor market than about inflation. Governor Michael Barr described the jobs situation as "stable" earlier this week, while Governor Waller called it "a satisfactory state" on Thursday—hardly an enthusiastic endorsement, but solid enough that if inflation fails to ease further, the Fed could consider hiking without disrupting employment.

"Monthly payrolls have softened in recent months, but low initial claims and a steady unemployment rate keep Fed officials from worrying about the labor market," wrote Andrew Hollenhorst, senior US economist at Citigroup, in a note. Citi projects just 20,000 jobs added in August, with July potentially revised down to a loss of 23,000, and unemployment possibly ticking up to 4.2%. But Hollenhorst expects the Fed to interpret these figures as "stable" rather than a cause for broader concern. Still, Citi believes the Fed's next move will ultimately be a cut.

Waller's inflation comments have led some fed funds futures traders to more firmly bet that the central bank will hold rates steady at its upcoming meeting in less than two weeks. Beyond typical seasonal factors, the August report is also influenced by other elements—the US government revoked Temporary Protected Status for thousands of Haitians in July, which could dent job numbers. This move is expected to affect 350,000 Haitians. Meanwhile, Vanguard, one of the largest asset managers, indicated its proprietary 401(k)-based data suggests August might add just 8,000 jobs, partly due to a "notable decline" in hiring among those aged 21 to 24.

BofA Report: Payrolls Are Just a Preview—CPI Holds the Policy Trigger

Waller at Jackson Hole clearly re-anchored policy focus on inflation: he argued that with unemployment at 4.1% and initial claims near multi-decade lows, the labor market broadly reflects full employment. By contrast, headline PCE inflation is up 3.7% year-over-year, with a six-month annualized rate of 4.1%—both well above the 2% target—so "price stability should be the Fed's primary focus." This policy function of "solid jobs, still-high inflation" briefly pushed September hike odds to roughly 65–70%, lifting the 10-year Treasury yield to around 4.80%, with Japan's 10-year yield breaching 3% and German and UK long yields hitting decade-plus highs.

However, the pricing landscape has since shifted. Governor Waller said yesterday that if August inflation continues to moderate, he leans toward holding rates in September, considering a hike only if inflation re-accelerates. So this is not a Fed-wide consensus on hiking; rather, Waller set a hawkish threshold, while the ultimate decision rests with the CPI report due September 11th.

Economists at Bank of America expect August nonfarm payrolls of just 40,000, with private sector gains of 35,000 and unemployment steady at 4.1%—noticeably weaker than the roughly 53,000 consensus. However, given nearly stagnant labor supply growth, summer seasonal distortions, and years of downward revisions to the initial August print, low job gains do not necessarily imply a sudden collapse in aggregate demand. BofA's true focus is on unemployment and labor force participation: if a rebound in participation pushes unemployment to 4.2%, employment data could materially shift the policy risk balance. If unemployment stays at 4.1%, the Fed is likely to interpret it as near full employment.

BofA argues the bond market impact from payrolls is clearly asymmetric: a rise in unemployment to 4.2% could drive the 2-year Treasury yield down 5–12 basis points and the 10-year down 5–10 basis points; a drop to 4.0% could push them up 5–6 and 5–8 basis points, respectively. The downside reaction is sharper because commodity trading advisors (CTAs) and active bond funds remain short duration, making weak data prone to trigger concentrated short-covering. Conversely, an overly strong payroll cannot lock in a rate hike prematurely, since September's PPI and CPI are still pending. BofA recommends going long 5-year Treasuries, positioning for a steeper 5s/30s curve, and taking tactical shorts on the dollar—weak payrolls could drive short-end yields lower faster, creating a bull steepener, while strong employment could lead to a bear flattener. But the ultimate success of this trade hinges on CPI: subdued inflation would reinforce a pause, lift bonds, and weaken the dollar; renewed inflation could push the Fed to hike at its September 15–16 meeting, reasserting upward pressure on real rates and the greenback.